Our commitment and willingness to succeed has prevailed in the face of tough trading conditions and strategic business changes.- Dave Nurek, Chairman
Economic and trading conditions
The recovery of the global economy remains fragile, slow and tenuous. Growth has been modest and unevenly spread. Geopolitical risks have surfaced, although they have not as yet had significant global macroeconomic repercussions.
Emerging market growth continues to outpace that of developed economies and across sub-Saharan Africa economic activity has remained fairly buoyant. This region is an increasing source of both revenue and investment for the Group.
Greater volatility in emerging market currencies has had a significant impact on the rand, which has depreciated by almost 19% against the basket of currencies in which Distell trades. Although this has positively impacted our export performance, it has also raised the costs of our key commodity inputs, especially those traded on an import parity basis.
Domestic trading conditions have proved challenging as competition intensifies and South Africa’s consumer spend on non-durable goods (food, tobacco and beverages) remains under pressure, given ongoing real declines in disposable income. Consumer confidence and business sentiment continue to be eroded by political uncertainty, infrastructure constraints and deteriorating local economic conditions. Whilst official unemployment levels have once again breached the 25% level, all indications are that the problem is more acute. Unable to take advantage of the recent improvement in growth amongst some of South Africa’s key trading partners, the country has seen ongoing job losses in the formal as well as the informal sectors as output potential is further constrained by electricity generation shortages, infrastructure deficiencies and a lack of key skills and competencies.
Distell’s financial performance
The Group’s strategy is aimed at enhancing shareholder value, through sustained growth in revenue and earnings. At the same time it aspires to deliver real opportunities for economic and social value creation for all stakeholders.
The Group continued to deliver value to shareholders, notwithstanding the prevailing adverse business conditions. Revenue improved 12,8% to R17,7 billion. EBITDA rose 23,2% to R2,5 billion. Normalised EBITDA, excluding abnormal items, grew 11,4% to R2,4 billion.
Although global economic conditions have led to a more challenging business environment, we believe our strategic direction remains relevant. We therefore continue to invest in strategic areas of the business, such as marketing, route to market, people development, strategic inventory, production and sales capability.
Net operating assets increased 19,3% to R11,7 billion. Investment in fixed assets and inventory increased by 14,6% and 9,8% respectively.
The Group remains in a strong financial position with a debt-to-debt plus equity ratio of 28,5%.
The regulatory environment
Globally the role of alcohol in society has come under increasing scrutiny as regulatory bodies seek to mitigate the harmful use of alcohol, while acknowledging the economic and social benefits that alcoholic beverages also provide.
Alcohol has been identified as a leading risk factor for non- communicable diseases, along with other lifestyle risk factors. Interventions to address non-communicable diseases have become a global priority as institutions such as the United Nations and the World Health Organisation drive a global action plan aimed at reducing the health burden they impose. It has become increasingly important for governments and players in the alcohol industry worldwide to co-operate in mitigating these factors and in sharing research and best practice in this regard.
According to World Health Organisation estimates, South Africa ranks amongst the leading countries in Africa as far as both per capita alcohol consumption and heavy episodic drinking are concerned. As the foundation for tackling these issues, we believe there needs to be far better co-ordination of existing domestic legislation between various authoritative bodies, and a rigorous enforcement of regulations.
In supporting government, the South African alcohol industry follows a rigorous process of self-regulation and complies with a stringentcode of marketing conduct. It also drives a combination of behaviour modification campaigns through life skills programmes and education, as well as programmes to promote community cohesion and job creation.
It runs skills development projects amongst licence holders to develop business capacity and to promote the responsible sale of alcohol within existing legal parameters. It also works with the authorities to combat illicit trade.
Distell is actively engaged with our fellow members of the South African alcohol industry in such programmes. Under our strategic theme of ‘Care and Contribute’ we are actively supporting community-based projects and are treating the prevention of fetal alcohol spectrum disorder (FASD) and educating youth to make prudent choices as company priorities.
We recognise the urgent need to promote the responsible consumption of alcohol and continue to collaborate with government at a national, provincial and local level to promote regulatory and other policy interventions that we believe can successfully address abuse. We are also in consultation with the authorities on proposed measures that we consider to be counterproductive in that they will not achieve their desired outcomes. More details about our stance in this regard can be found in our electronic sustainability report.
Richard Rushton, our new managing director, has been working closely with Distell’s leadership, management, employees and other key stakeholders to review and adjust the company’s corporate strategy and business plans. This includes its strategic aspirations and business goals, as well as the organisational capabilities required to anticipate and respond to the dynamics of the fast-changing environment in which we operate.
Distell is no longer simply a South African company that exports to the world. It is a company that is developing its routes to market, on its own and in partnership with others, in territories across Africa, Europe, Asia and the Americas. It has a unique, high-quality portfolio of brands and products that enables it to compete with the best in selected markets across focused consumer segments and occasions.
It is this significant challenge and opportunity that today confronts and defines Distell. The challenge to defend increasingly competitive home markets whilst building the capability, agility and ingenuity to grow in countries far away from its home base, while balancing shareholder returns with the need to invest deeply in its people and in new route-to-market capabilities to support and sustain long-term market success in Africa and in select global markets. This is a challenge that I am confident Distell will face with courage, fortitude, innovation and disciplined execution.
Distell’s opportunities and challenges have necessitated a new approach and new structures, which are currently being put in place within the business (refer to the managing director’s report). The focus on strategy crafting, validation, articulation and effective execution are helping to reconnect and re-energise Team Distell as it builds on the company’s sturdy foundation, expertise, diverse people and inherent business strengths.
The board has been fully engaged in the new developments. We have every confidence in the new course being followed, with its goal to make us a better and bolder company and corporate citizen, while creating sustained value for all our stakeholders. More details about the project are provided in the managing director’s report.
Corporate governance and sustainability
The board of directors is responsible for both the stewardship and governance of the Group.
The Group aims to achieve best governance practice and fully recognises that sound corporate governance is an important precondition for long- term value creation.
The Group’s governance framework is based on the King III Code of Governance principles (King III) and the board confirms that the Group has in all material respects applied the principles of the code during the financial period. Governance processes are also continually enhanced to ensure compliance with legislation, regulation and the JSE Listings Requirements.
As part of its role the board assesses and authorises strategic and business plans submitted by management, including key risks and risk mitigation responses, and agrees on key performance indicators. The board oversees the executive management who are tasked to implement strategies and business plans and who carry out the operational running of the business.
The board is also charged with reporting to shareholders on the Group’s performance.
We believe that our board has the diversity and mix of skills, experience and knowledge of the Group to enable it to discharge its responsibilities successfully.
Further details on corporate governance appear in the corporate governance report. In presenting this report we seek to explain how the company is directed and controlled by describing roles, functioning and membership of the board and its committees.
BEE ownership restructure
In line with our commitment to transformation and broad economic empowerment we concluded a BEE ownership transaction in 2005, introducing a BEE consortium, through a shareholding in WIP Beverages (WIPB), as indirect shareholders in South African Distilleries and Wines (SA) Limited (SADW), Distell’s primary operating company.
The board identified WIPHOLD as its strategic BEE partner and agreed to its 40% shareholding in WIPB through WIPHOLD DISTILLERIES. An Employee Share Ownership Programme trust was allocated 45% of the shares in WIPB with a CSI trust holding the remaining 15% interest.
The eight-year partnership between Distell and WIPB, during which WIPHOLD supported management of Distell in realising Distell’s growth objectives, was unwound in January 2014 when the consortium opted to exercise its put option.
Distell acquired all the shares in WIPB at a price determined by a formula set out in the original agreement. The purchase consideration was settled through the issue of Distell Group shares to the members of the BEE consortium.
Distell then entered into an agreement with the CSI trust in terms of which the trust acquired all the shares in WIPB from Distell in exchange for its direct holding in Distell. Through this transaction Distell introduced the CSI trust as its new BEE partner, enabling it to maintain its BEE ownership status. The transaction enhances the financial sustainability of the CSI trust, enabling it to effectively fund its corporate social investment programme. WIPHOLD remains a vested shareholder in Distell.
Distell’s BEE ownership initiative has created significant value for all its stakeholders.
Board of directors
On behalf of the board, I wish to thank former managing director, Jan Scannell, for the outstanding role he played in turning Distell into the formidable business it has become. We also warmly welcome his successor, Richard Rushton, who brings impressive experience, particularly in emerging economies, as he energetically and ably builds on this legacy.
Our gratitude is also extended to Duimpie Bayly for his wise and erudite insights as a long-standing and much-valued member of our board. We wish him well in his retirement.
Thanks too must go to Distell’s former company secretary and previously director of corporate development, Stoffel Cronjé, who has also retired. He played an integral role in the strategic focus and development of the company. We welcome Lizelle Malan who succeeds him.Lucas Verwey, who served as a non-executive director on the board from 2013 until earlier this year, is now providing the benefit of his skills at an executive level within the company, driving business transformation.
Our commitment and willingness to succeed has prevailed in the face of tough trading conditions and strategic business changes. We are heartened by the tenacity of both management and staff, as well as the enthusiastic and focused way in which they have embraced the new leadership and the business strategy that will steer our future growth.v
We are very grateful for such commitment and allegiance. Our appreciation also goes to our shareholders, partners, customers and suppliers for their continued support.
25 August 2014
The strength, appeal and diversity of Distell’s portfolio of brands, as well as our broad geographic footprint across a range of economies and regions, provide Distell with opportunities to further unlock real stakeholder value in a trading environment which is en route to recovery, albeit at modest levels.- Richard Rushton, Managing Director
Distell is a company with a proud heritage, an unrivalled portfolio of standout products and brands, highly capable and committed people and an enviable global reach. It has delivered exceptional returns to shareholders over many years and can be justifiably proud of its track record of global awards for outstanding product quality.
Like every corporate in today’s fast-changing, competitive global market, however, it cannot afford to rest on its past success. It needs to adapt, change and innovate, otherwise all of its past growth and achievements will matter little in a dynamic, uncompromising world.
The world facing Distell is a very different world to the one that confronted it even five years ago. The global alcohol beverages industry has consolidated with a small number of powerful, highly efficient, highly competitive, acquisitive players all focusing on a limited range of market opportunities. This means that the window of opportunity is closing fast as competitors entrench their positions and as markets formalise and develop.
Growth in mature, established markets has slowed and the only real opportunities for significant future growth lie in emerging markets in Africa, Asia and the Americas. These are not markets for the faint- hearted. They require an appetite for risk, bold, courageous and decisive people and a significant investment in the infrastructure and know-how required to build successful, sustainable routes to market.
These are markets already ably represented by tough and street-smart local and international players who understand their markets and defend their share with passion and vigour. They are markets with substantial, consuming populations and rising disposable incomes that allow them to demand increasing value, quality, enhanced consumer experiences and global premium brands. These consumers expect integrity and ethical conduct, local management that they can relate to, a long-term perspective and a commitment to contribute to local economies.
Old forms of competitive advantage are constantly eroded as consumers look to new, creative, often aspirational and emotive brands and innovative sources of packaging and value. What was successful yesterday is no guarantee of tomorrow’s success. Ongoing innovation, creativity in products and brands, effective routes to market and business models, talented leadership and committed people form the currency of future success. The traditional export-focused model used by many corporates including Distell is diminishing in impact and influence.
- It has an extensive, high-quality brand and product portfolio that incorporates distinctive, competitive offerings across many consumer segments and consumption opportunities.
- t has a portfolio that is ideally suited to intermediate premiumisation in many developing markets. It has unique brands with provenance and spirit of place that are authentically grounded in the heart of South Africa’s Winelands, in historic French cognac houses and in wind-swept Scotch whisky distilleries.
- It has a diverse pool of talented people around the world. These are people who are not strangers to hard work and testing environments and who have the tenacity, creativity and passion to be resilient and successful.
- It has highly competent professionals who have implemented sound operating models, financial disciplines, governance structures and management routines.
- It has a culture that is constantly challenging, thrives on innovation and values the contribution of its people.
Distell is a company that thrives on change. A short time ago wine and spirits dominated the value delivered to shareholders. Yet it has rapidly and successfully transformed a marginal cider category into a world- leading, high-volume, efficient cider business that currently contributes more than 60% of Distell’s value. Distell is currently the second-largest cider producer in the world and now has ambitions to become the leading cider producer in the world.
In looking to the future it is clear that Distell needs to diversify its geographical presence in order to mitigate currency, economic, regulatory and other risks. In growing its global footprint it has the challenge of establishing economies of scale through efficient local routes to market, including production, sales and distribution. Success requires the right mind-set and an unrelenting focus on efficiency, coupled with creative marketing and local brand activation.
- We will focus on Africa and utilise our African roots and expertise to be the leader in selected marketplaces.
- We will build a meaningful position in one other carefully selected and validated global regional marketplace.
- We will optimise our brand portfolio, investing in selected power brands that will win in important regional marketplaces and divest from brands that contribute to complexity without significant returns.
- We will build, over time, a focused portfolio of premium spirits brands to complement and supplement our cider, wine and accessible spirits portfolio.
- We will invest in owning the route to market, including local production and distribution in selected geographies where we believe we will have maximum impact, market penetration and returns over the long term.
- We will create a lean and efficient supply chain in order to respond with agility and speed to changing market conditions whilst delivering enhanced customer service, reliability and quality at lower costs.
- We will entrench trade marketing, revenue management and other important disciplines to inform the allocation of our resources and focus the work of our people while engaging our consumers and customers.
- We will invest in appropriate technology, our people and in benefiting the communities within which we do business. In so doing we will improve our agility, decision-making and earn our licence to trade.
We are a proud African alcoholic beverages company with heritage, global reach, world-class people and the ability to do extraordinary things!
We craft distinctive alcoholic beverage brands, enhance memorable moments and inspire responsible enjoyment. The value we create enriches the lives of our people, shareholders and the communities within which we live and work.
The six themes that underpin our future strategic journey have been carefully crafted in support of our vision and mission as well as the strategic choices that we have made. They contain the aspirations and commitments that will guide us on our future strategic journey:
- Lead selected markets
- Craft distinctive and compelling brands
- Own the last mile
- We will establish and grow a portfolio of alcoholic beverages businesses that are regional leaders in selected emerging markets.
- We will grow strong, dominant brands that win across consumer segments and occasions. We will be the world’s leading cider company.
- We will market a differentiated and distinctive product and brand bundle of wines, spirits and ciders that appeal to relevant consumer needs in the most important consumer occasions.
- We will craft a portfolio of distinctive, niche premium spirits and wine brands that will complement our mainstream, accessible high-volume wine, spirits and RTD brands.
- We will increase our market penetration, coverage and service offering by championing trade and consumer insights, delivering distinctive in-outlet consumer and shopper programmes, implementing scientific revenue management practices and building effective and efficient sales and distribution capabilitie
- We will win through a clear focus on the appropriate channels to market and on owning the route to market in selected geographies around the world. We will also carefully build a strong network of partnerships to accelerate our growth.
- We will drive operational efficiency in ways that enable consistent quality, competitive pricing and improved returns.
- We will drive an efficient, end-to-end supply chain supported by innovation and world-class operating practices.
- We will unlock value from any underperforming or underutilised assets.
- We will build the capabilities required to win, grow and evolve in a complex, ever-changing world.
- We will develop industry foresight, business insights and accelerate the pace with which we translate these into action.
- We will build a pipeline of innovation opportunities including digital marketing and we will be relentless in reducing unnecessary complexity in our operations
- We will invest wisely in our talented, diverse people, ensuring an inclusive, well-aligned Distell.
- We will establish and maintain Distell’s reputation as a caring, responsible corporate citizen who contributes to the countries and communities in which it invests.
- We will implement environmentally sustainable and ecologically friendly business practices.
- We will promote responsible alcohol consumption.
- We will champion transformation and ethical business practices.
The reality is that the road ahead will be challenging. We will need to invest ahead of the curve in building distinctive capabilities both at our corporate centre and in our market-facing business units. We will need to overcome past shortcomings by investing heavily in our people, appropriate technology and in ways of competing in the ‘last mile’ for the right to directly and effectively serve our customers and engage with our end consumers.
Our investors, shareholders and partners will need to have realistic expectations regarding our short-term returns as well as the patience required to share the rewards of our long-term journey with us. Tvhis is not a race that is won through expediency in the short term but rather a rewarding investment in building sustainable competitive capability. We respect our competitors and the success that they have achieved through disciplined focus and relentless execution. We expect no less of ourselves and are totally committed to the journey that lies ahead. Our leadership will guide this journey and our people will be our mainstay throughout.
The road ahead – structuring for success
As indicated earlier, there are a number of critical strategic capabilities that Distell will need to build in order to effectively support and execute our revised business strategy. In order to focus the development of these capabilities, we shall be making a number of changes to our organisational structures during the current year. These key changes include: • introducing separate management structures to champion our premium, luxury and our accessible, mainstream brands. These two distinctive groupings of brands require very different competencies to drive value creation and consumer engagement in their respective market segments. Consequently we have appointed an executive director to head up each of these brand portfolios and to champion their growth going forward; • integrating our portfolio of wine properties and agricultural support units into one business unit – Distell Vineyards & Estates – in order to further unlock value from our wine brand portfolio and farming assets; • introducing a business unit with an organisation-wide focus on innovation as a key driver of future revenue growth and competitive advantage; • integrating our procurement, production, quality management, and technical services functions into a single end-to-end supply chain division to enhance efficiencies, accountability and asset optimisation; • establishing an independent, strategically aligned human resource function with representation at a director level; and lastly • establishing a corporate development function tasked with spearheading strategic foresight, strategic planning and new business development within Distell.
The strategic risks we face
As we embark upon our challenging strategic journey we are mindful of proactively identifying, mitigating and addressing the key strategic risks that face us. Risk management remains an integral component of the day-to-day running of our business. It is our responsibility to maximise our opportunities and to minimise the threat that any given risk presents.
We have developed a well-structured process for identifying, monitoring and managing the principal risks that Distell faces. (Refer to our corporate governance report.)The board of directors reviews these risks on an annual basis. The recent review reveals nine key strategic business risks, pertaining to:
- Industry consolidation and geographic risks
- Business transformation
- Regulatory environment
- Illicit trade in alcoholic beverages
- Management capacity and talent
- Sustainable supply of raw materials
- Security of business information
- Changes in consumer consumption trends
- Successful Burn Stewart integration
Business conditions globally remain challenging and volatile. Despite unfavourable trading conditions and headwinds faced in several markets, the Group’s underlying business is sound, enabling us to confidently pursue our strategic course and deliver ongoing value to shareholders.
Sustained revenue growth, improved operating margins and the efficient use of assets are key drivers of value creation in Distell.
Revenue grew 12,8% to R17,7 billion on a sales volume increase of 3,1%. Our businesses in both the domestic and international markets contributed to revenue growth, benefiting from both a weaker rand as well as the incorporation of the Burn Stewart brand portfolio.
Our approach is to drive revenue growth by developing and optimising superior brand and product portfolios that are relevant to consumers in the markets where we operate. It is also important that we deliver quality at competitive prices and maintain responsible margins.
To be able to afford incremental marketing investment whilst at the same time protecting margins requires that we continue to drive efficiencies across the business. Efficiencies gained in procurement, production, distribution and support services have enabled us to substantially increase investment in sales and marketing activities without sacrificing margins.
Reported EBITDA increased 23,2% to R2,5 billion. Normalised EBITDA grew 11,4% to R2,4 billion while the EBITDA margin was maintained at 13,5%.
Delivering value through the efficient use of our asset base remains a strategic priority. A significant investment in bulk spirits in maturation, to support longer-term consumer demand, especially in whisky and cognac, has contributed to the increase in total assets and deterioration in asset turn.
Global economic activity has broadly strengthened, but conditions are expected to remain volatile in 2014 – 2015. Much of the impetus for this growth has come from the recovery in advanced economies whilst growth in emerging markets will be lifted by stronger exports to advanced economies.
The balance of risks has improved but remains on the downside. There are also three caveats to this view held by the IMF. Firstly, emerging market risks have increased, there are risks posed by lower-than- expected inflation in advanced economies and significant geopolitical risks have resurfaced. Additional downside risks include continued economic volatility, particularly for emerging market currencies, as well as the potential for increases in global oil prices in 2015. Conversely, economic growth in sub-Saharan Africa is expected to continue at a robust pace.
According to the Bureau for Economic Research tough trading conditions are expected to persist in the South African economy, but it is possible that they could be ameliorated by a marginal improvement in real consumer disposable income in 2015.
The strength, appeal and diversity of Distell’s portfolio of brands, as well as our broad geographic footprint across a range of economies and regions, provide Distell with opportunities to further unlock real stakeholder value in a trading environment which is en route to recovery, albeit at modest levels. Substantial investments will be made in Distell’s new corporate strategy to position the business for sustainable growth on the African continent and in select emerging markets globally. This, coupled with the growing diversity and expertise of
Distell’s people and brand footprint across the world, offers us the real promise to turn Distell into a regionally diversified and relevant player.
Responsible corporate citizenship is key to Distell’s long-term sustainability and to improving the overall quality of life of the communities we serve. We recognise that we have a responsibility to address a number of important areas of concern to our stakeholders – both internal and external to Distell. These issues include: • Responsible drinking • Excise and illicit trade • Community development • Employment equity • Enterprise development • Personal growth and well-being • Transformation • Responsible supply chain management • Environmental sustainability.
We are committed to enriching the lives of the communities we serve through employment creation and enterprise development. We recognise the potential that exists to partner with entrepreneurs and communities to produce the raw materials required by our business as close as possible to our production facilities. In South Africa we are excited by the potential to increase the local supply of apple concentrate through black economic empowerment and small enterprise development, using cultivars and geographical areas that have not traditionally produced apples.
As we continue to grow and expand in Africa we will investigate the possibility of local cultivation of crops such as grapes and cassava. We will apply the deep technical expertise that exists within our newly established Distell Vineyards & Estates business unit to support and further develop such initiatives. Distell is also exploring ways to develop partnerships, unlock supply opportunities and create other potential enterprise development opportunities within its portfolio of businesses.
We recognise our obligation to ensure that our leadership and management ranks are reflective of the demographics of the countries in which we operate. We are committed to improve our track record in this regard and to building a diverse, inclusive and representative workforce. We will meet this challenge by proactively developing our people and by applying the necessary guidance through our employment policies and practices. In a highly competitive world in which talent is increasingly scarce and mobile we will always ensure that diversity is matched by competence and leadership effectiveness.
Kindly refer to our corporate responsibility report and to our electronic sustainability report for further details.
This past year has been a very demanding year for Distell. It has been a year of leadership transition and of refocusing the business on its opportunities and challenges. It has been a year of integration, consolidation and of setting up new, well-focused business units designed to accelerate and sustain corporate growth. We have started to make significant investments in our people and in new game-changing capabilities that will drive future growth.
This is a company with a proud heritage, strong integrity and values and deeply skilled, committed and passionate people. We are excited about the future and about our aspiration to make Distell’s brands and products market leaders in selected regions in the world. In reshaping our business we are infusing it with a refreshed energy to build an even better Distell capable of achieving extraordinary things. It is a time that calls for courage, resolve and disciplined execution on the part of Distell’s ever-growing, diverse and globalised community of employees. We are now, more than ever before, ‘leaning in to aim higher’. By this we mean collaborating with one another, constantly challenging one another to become more efficient, innovative and to raise our game
I want to extend my thanks to the team of exceptional directors, managers and people throughout Distell who are leading these changes with me. They bring their passion, strategic insights, depth of knowledge, experience and genuine commitment to Distell to work with them every day. Through our common purpose and hard work we will deliver on our vision to achieve extraordinary things!
Managing Director Stellenbosch
25 August 2014
Tel : +27 21 809 7000
Facsimile: +27 21 886 4611
Annual general meeting: Oct 2014
Interim report: Feb 2015
Annual financial statements: Sept 2015